Reserve currency

A reserve currency is a foreign currency that is held by governments, central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

Before World War II, foreign exchange such as the British pound made up less than 30% of global reserves, gold being the primary exchange asset held by central banks. However, by the middle of the 20th century, the United States dollar had become the world's dominant reserve currency.

Because other countries must obtain the reserve currency to pay for goods and services (and bear the associated, albeit small, transaction costs) the issuing country can purchase everyday goods at comparatively low prices. At the same time, strong global demand for the reserve currency enables the issuing country to borrow on more favorable terms, including lower interest rates.